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Friday, October 7, 2011

Great interview discussing the recent announcement out of the UK that they will be expanding their QE program. That's right, it is not only the Federal Reserve that is printing money and purchasing debt, it is happening around the world.

Thursday, October 6, 2011

The interest rate on a 30 year mortgage just fell under 4% for the first time in history. Truly incredible times we live in.

The government now issues all new mortgages, (or insures them) allowing lenders to lend an unlimited amount of tax payer money into the market for toxic mortgages. This has the effect of pushing rates downward (higher demand) just as it did during 2000 - 2006 when loans were packaged as CDO's and sold off to Wall Street.

While the government is spending our future today by lending money to Americans to purchase homes they should not be buying, the Federal Reserve is now purchasing 30 year government bonds. This action has brought the interest rate on a 30 year treasury bond under 3%, also closing in on record territory.

When bond rates fall, their principle value rises. When bond rates rise, their principle value falls. It is like a see-saw.

To compare the government and Fed's actions today, imagine if they stepped into the market to purchase worthless dot com stocks in the year 2000 (to try and push prices higher), or entered the residential real estate market in 2006 and began purchasing homes on your street at bubble prices to keep them artificially afloat.

It is no different. When the interest rates on these bonds rise, the asset values will be destroyed.

In 2000 and 2006 the government and the Fed stepped in to bail out Wall Street when they were buying the assets at bubble prices, but who will bail out the government and the Fed when the assets they are purchasing today fall precipitously?

I was in Target late last night at the check out line and I pulled out my Bank of America debit card to pay when the guy in line behind me said, "Oh, they're getting your $5 a month too, huh?"

The anger over Bank of America to charge $5 per month to use a debit card amazes me. The large banks have stolen trillions of dollars from the American public both through direct tax payer payments and indirect funds from the Federal Reserve.

They have taken this money and used it to leverage up their trading accounts and pay out enormous annual bonuses to their upper management and traders. Almost no money has moved back into the hands of the public in the form of mortgage, small business, or consumer loans. (Those now come from the government - meaning Americans through current and future taxes) The money we handed to them sits on their balance sheet in the form of cash reserves.

I have discussed this on a regular basis for 3 full years, but Americans over this period for the most part could care less. It is much more difficult to see the money stolen from them through taxes and printed currency than it is to see $5 removed from their account every month.

Things have been taken up a notch over the past month with the "Occupy Wall Street" movement. The protesters recently made an appearance in my home town of Charlotte, and they have even spread out to cities like Seattle.

When we reach our real debt crisis, a large portion of the fabric that holds our society together is going to come unglued. People cannot understand this unless they turn on the news and it is happening. The very beginning of this process is now taking place. The following is the visual confirmation that Americans need taking place on the streets across the country as we speak.

Wednesday, October 5, 2011

Part of the reason I believe there will not be a change in course for government spending without a "Greek" like crisis is that Americans are now more dependent than ever on government support.

With Governor Christie removing his name from the Presidential race there once again remains no candidate with the stomach to do what is best for the country long term over what gets them elected and higher in the polls short term. (Other than Ron Paul who does not have a realistic chance of winning)

Released this afternoon:

Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data.

Another great interview from one of my favorite people in the financial spectrum: Kyle Bass. He made his name as one of the legendary short sellers of subprime debt a few years back. I could sit and listen to him discuss the markets for hours. Sorry, I know that sounds strange.

The interview below is regarding the European debt crisis and begins 2:30 into the clip. Poor David Faber (who I like) does his best to "cheerlead" the markets for his network during the discussion, but Kyle comes relentlessly back with something CNBC always struggles with; common sense.

Tuesday, October 4, 2011

The 2011 fiscal year for the United States has now come and gone. Let's take a look at how well we managed our finances on the year:

The deficit over the previous year totaled $1.228 trillion, bringing us to a total of $14,790,340,328,557 in credit card government debt.

The debts are accelerating as we move toward the infamous year of 2012 when the the first of the baby boomers begin to retire in force. It is important to remember that after contributing to their 401k their entire lives to save for retirement, these baby boomers will now be removing their hard earned money from their 401k in order to live the good life.

What does removing money mean? Selling stocks.

The good life, unfortunately, will be short lived for many. We are rapidly moving toward the United States of Greece. From Jim Quinn in his article today:

Kenneth Rogoff and Carmen Reinhart in their book "This Time is Different: Eight Centuries of Financial Folly," using data from 44 countries over 200 years, concluded that once a country’s national debt exceeds 90% of GDP, the economy stagnates and ultimately makes that country vulnerable to a debt crisis.The U.S. national debt as a percentage of GDP is currently 97% and will reach 107% in 2012.This does not count state and local debt, Fannie Mae and Freddie Mac debt, and the unfunded liabilities for Social Security and Medicare.We are at the same place Greece was in 2007. But we’re no Greece, right? This time is different.

Sunday, October 2, 2011

I drove up to Blacksburg, VA yesterday to watch my beloved Clemson Tigers upset the Hokies and stay undefeated. The game was raining and freezing, but I hardly noticed. It was a great time.

During the drive home this morning I had the opportunity to listen to a great discussion between Brian Pretti and Jim Puplava on Financial Sense Radio. The conversation was based around relative value in terms of all asset classes and where we are in different market cycles for each asset.

This is one of my favorite topics for analysis and discussion and something I immerse myself into whenever possible in the form of radio, books, or articles.

The future direction of an asset in my view is based on two major components:

1. Value
2. Sentiment

Value is determined by looking at the price paid for an asset based on its current and expected future return. There are two components to an asset's return:

1. The annual return you receive for purchasing the asset such as interest or dividends
2. The price movement of the underlying assets also known as capital gains

To help make all these components easier to understand we'll focus on determining value based on the annual payment you receive from owning an investment using examples from different asset choices:

An annual return is probably most simple to view looking through a lens of a bond. Purchasing a 10 year government bond today, an investor knows that he will receive 1.92% on his investment each year for a 10 year period. At the end of 10 years, the investor will receive their original investment amount back in full.

Now let's look at purchasing a share of stock. If an investor purchases a share of Wal-Mart today, they will receive an annual payment of 2.8% per year. This is called a dividend payment. The key difference is that Wal-Mart can lower or raise its dividend anytime it wishes. A bond is locked in at a specific rate.

How about real estate? An investor purchases a piece of real estate by looking at Net Operating Income (NOI). This is the annual return an investor receives after subtracting all annual expenses from income (rent). The price an investor pays for this income stream is determined by the percentage return they want to receive on their money. (Just as in the examples above) If an investor wants a 10% annual return, and the annual NOI is $100,000, then they will offer $1,000,000 for the property.

What about gold or commodities? Gold provides an investor no return: 0% annual interest payment. Its purchase price today is based solely on speculation that prices will be moving higher in the future. This is why through most of history gold is the worst investment asset class.

If this was all that mattered, the annual return provided by an investment, then we could stop here and investing would be very simple. However, there is a second and equally important component involved in the future direction of asset prices: sentiment.

Different asset classes historically have moved through periods of long term secular bull and bear markets. During the end of a bear market, such as gold between 1980 - 2000, investors wanted nothing to do with owning it. No one wanted gold in 1999, when its price was hovering around $250 an ounce.

During the end of a bull market, such as stocks between 1980 - 2000, everyone wants to own it. Investors poured into Internet stocks in 1999. This creates the boom bust cycle where assets go from under valued to over valued.

Rather then provide numerous historical examples, we will just skip to where we are today, and where I think we go from here.

Right now we are in the latter stages of a secular bull market in commodities. While I believe we have one more major pull back (which may have already begun), I believe after the next correction we will move back into the final portion of the optimism phase and then enter the mania, such as we saw in stocks in 1999 - 2000 and real estate in 2005 - 2006.

Stocks have been in a bear market since March of 2000, the peak point of the previous mania. During every step of the current bear market, stocks become more attractive to own, because less people want them. I am far more bullish on stocks today with the DOW under 11,000 than I was when they were at 12,7000. Price to earnings ratios will soon reach depressed bear market bottom levels, as investors feel that stocks will go down forever, just like they did with gold in the year 2000, and with stocks in 1982. (After stocks fell for 16 years)

Real estate began its current bear market in 2007 and continues on today. Real estate usually flushes out and begins a new up cycle after only a few years (1990 - 1993) but our government has decided this time that they will do everything in their power not to let prices fall. We must now wait until the government steps out of the way and allows prices to correct to free market levels before we reach bottom. This could take many years judging by the amazing level of ignorance that currently occupies the role of our country's leadership.

Bonds are now in the final stage, the mania, of a 30 year bull market, which begin in 1982. Prices investors are paying for bonds today will be looked back on as equal or above the insanity of the dot com stocks of 2000 or real estate in 2006.

To lend to a government that is bankrupt for 30 years at a 3% return, when inflation is currently running at 3.6% makes no logical sense. Guaranteeing a real loss of .6% (3.6% inflation - 3% interest) per year while investing in a government, like Greece, that is a ticking time bomb is the definition of lunacy. However, sentiment, not logic, has full control now over the bond market. Investors are now betting that the underlying asset will move higher in value, paying no attention to the return on their money. This was seen when investors bought stocks at all time record low dividends in 2000 (and record high price to earnings ratios) and bought commercial real estate in California at cap rates of 1 or even 0 back in 2006!

You must try to imagine the world as an ocean of money that flows into different regions and different assets within that region. Investors today have the option of investing in commercial real estate in Brazil through a REIT, an oil company in Canada, or a utility company in Hong Kong. They can now do this in different currencies and the movement takes place at the speed of light.

When I make an investment decision or make plans to build a company, I do it first thinking about these global capital flows. I take into account current and future value, current and future sentiment, and how politicians will affect (most likely hurt) that company or investment in the years ahead.

Everything is tied together in an interactive web. When you immerse yourself into the capital flows around the world you can almost feel the money movement and future direction, like a fisherman who spends his life out on the open water.

I wake up in the morning excited to immerse myself into this world. The financial markets, connected now through the Internet, are the one true global financial community. The size and power of the community is breathtaking.

Think how the bond market has brought Greek politicians to their knees, while only three years ago they felt invincible. The financial markets dictate how things move forward today. If the stock market crashes, directly impacting consumer sentiment in America, it will be the death knell for Obama's re-election.

In closing, I believe commodities and all risk assets have one major correction ahead. The herd will continue to pile into government bonds when this correction comes at the absolute worst time in history, and they will be slaughtered. Again.

This will be the time to put remaining available cash into commodities for the final leg up.

For those investors looking for short term answers, I will do my best to provide them. However, those that do not put the time in to researching market cycles will most likely not have to courage to act when others are running the other direction. It is always easiest to move with the herd. Always.

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.